The GCC’s inflationary dynamics support asset prices in the short term. In a textbook case, if you have market imbalances (money or goods and services) and you expect prices to adjust to bring the economy back to the equilibrium. However, GCC countries are unwilling to: 1) change their currencies’ relative price (not depegging/revaluing), despite the positive terms-of-trade shock, 2) let consumer prices rise (cap on rental increase, cutting import tariffs, price cap on basic commodity prices), 3) increase the price of local currencies and 4) counterbalance the monetary easing with fiscal tightening (giving higher wages, transfers, subsidies, lower import tariffs).

Despite the recent moves to increase reserve-requirement ratios these markets are still flushed with liquidity. While part of this liquidity is feeding SWFs and is invested offshore, the monetary expansion and credit growth is still likely to push asset prices higher in the short term in the region and inflate the asset bubbles in the medium term (but with still a long way to go, in the mainstream view).​

The GCC’s inflationary dynamics support asset prices in the short term. In a textbook case, if you have market imbalances (money or goods and services) and you expect prices to adjust to bring the economy back to the equilibrium. However, GCC countries are unwilling to: 1) change their currencies’ relative price (not depegging/revaluing), despite the positive terms-of-trade shock, 2) let consumer prices rise (cap on rental increase, cutting import tariffs, price cap on basic commodity prices), 3) increase the price of local currencies and 4) counterbalance the monetary easing with fiscal tightening (giving higher wages, transfers, subsidies, lower import tariffs).

Despite the recent moves to increase reserve-requirement ratios these markets are still flushed with liquidity. While part of this liquidity is feeding SWFs and is invested offshore, the monetary expansion and credit growth is still likely to push asset prices higher in the short term in the region and inflate the asset bubbles in the medium term (but with still a long way to go, in the mainstream view).​

INTERNATIONAL. GCC countries still offer a safe haven with their mounting oil windfall. Oil prices at US$130 per barrel are adding.US$1 billion a day to the region’s current account surplus. With surging liquidity and deeply negative real rates, monetary policy is extra-loose and the recent hikes in reserve requirement ratios help only at the margin. While adding inflationary pressure, this macro story should push asset prices higher in the short term in the region, before giving way to asset bubbles in the medium term.

In a research paper, Merrill Lynch said it remains relatively bullish on Middle East equity markets. GCC markets (ex-Saudi Arabia) outperformed emerging markets by 1590bp in first half 2008.

The macro backdrop remains excellent in the Middle East, although new catalysts are needed to attract fresh money inflows in the near term. The investment bank said its preferred market is Kuwait, which stands out for its high liquidity and cheap value. Qatar stands out as the best macro story, but it is one of the more expensive markets. Merrill advised investors to be more stock-specific elsewhere in the region. Its top picks are First Gulf Bank and Union National Bank, in the UAE, and Qatar National Bank.

The currency forwards have softened considerably in recent weeks, suggesting that the market has curtailed its expectations of a possible revaluation of GCC currencies. Merrill remains of the view that the GCC currencies are subject to significant appreciation pressures. Its trade recommendation is to gain exposure to a six-month forwards basket of long KWD and AED versus short USD.

The bank initiated coverage of Dubai Holdings, DP World and TAQA last month with a generally constructive view of credit fundamentals for these UAE corporates, underpinned in each case by their quasi-sovereign status. In a research note it also provides close analysis of the background to its current EEMEA credit sector view, including the strategic backdrop for our ratings on the GCC corporates, as well as trade ideas, issuance trends, supply expectations, and more.

INTERNATIONAL. GCC countries still offer a safe haven with their mounting oil windfall. Oil prices at US$130 per barrel are adding.US$1 billion a day to the region’s current account surplus. With surging liquidity and deeply negative real rates, monetary policy is extra-loose and the recent hikes in reserve requirement ratios help only at the margin. While adding inflationary pressure, this macro story should push asset prices higher in the short term in the region, before giving way to asset bubbles in the medium term.

In a research paper, Merrill Lynch said it remains relatively bullish on Middle East equity markets. GCC markets (ex-Saudi Arabia) outperformed emerging markets by 1590bp in first half 2008.

The macro backdrop remains excellent in the Middle East, although new catalysts are needed to attract fresh money inflows in the near term. The investment bank said its preferred market is Kuwait, which stands out for its high liquidity and cheap value. Qatar stands out as the best macro story, but it is one of the more expensive markets. Merrill advised investors to be more stock-specific elsewhere in the region. Its top picks are First Gulf Bank and Union National Bank, in the UAE, and Qatar National Bank.

The currency forwards have softened considerably in recent weeks, suggesting that the market has curtailed its expectations of a possible revaluation of GCC currencies. Merrill remains of the view that the GCC currencies are subject to significant appreciation pressures. Its trade recommendation is to gain exposure to a six-month forwards basket of long KWD and AED versus short USD.

The bank initiated coverage of Dubai Holdings, DP World and TAQA last month with a generally constructive view of credit fundamentals for these UAE corporates, underpinned in each case by their quasi-sovereign status. In a research note it also provides close analysis of the background to its current EEMEA credit sector view, including the strategic backdrop for our ratings on the GCC corporates, as well as trade ideas, issuance trends, supply expectations, and more.